John Wolfgang is a young lawyer with an appreciation for writing and entrepreneurship.
When an athlete and a sponsor negotiate a sponsorship agreement, there are six key aspects that need to be covered. Here are some basic recommendations regarding both the athlete’s and the sponsor’s best interests.
1. Scope of Agreement Relating to Products
In any sponsorship agreement it is fundamental that the parties clearly define the scope of the licenced good or service that is intended to be promoted. The definition of the product is essential in determining other factors that form the contract such as the exclusivity provision (examined in-depth later), the categories or types of advertisements, and the issues of non-compete clauses.
Sponsor’s (Licensee) View
- Seek a broad definition of the scope of the products
- Analyse market trends to see anticipated areas of expansion
Athlete’s (Licensor) View
- Seek a very narrow definition of the scope of the product
- Ensure that no conflicting sponsorship is occurring
2. Exclusivity / Non-Compete Clauses
In sponsorship agreements the issue of exclusivity gives rise to many disputes. In circumstances where a licensor has several events on throughout the year there may be a misunderstanding that the licensee has exclusive main sponsorship rights over each event as opposed to one or several selected events. This can be the foundation for a lengthy legal battle that could have been easily resolved by proper negotiation at the early stages of the agreement.
A similar issue that arises is that of the non-competing sponsors. A licensee will want to avoid the circumstance where there are many sponsors at the same event that are promoting or selling products in the same market as them. This can lead to a cluster which results in less effective marketing. There may also be a provision contained in the contracts of sponsorship which state that “X” is the dominant sponsor and as such is required to have more signage or impressions than any other sponsor at the event regardless of market sector.
- Give unambiguous details of what exactly this agreement will cover
- Expressly state the events that will feature the athlete / licensee
- Highlight at an early stage if there will be any sponsors that may conflict with this athlete / licensee
- Ensure that as many events are secured as possible to maximise coverage
- Do background searches into potential events in the pipeline for the sponsor and enquire about these
- Demand a non-compete clause be inserted into the contract so that you have exclusive marketing rights within your sector at each event
- If you are the main sponsor at the events demand that a dominant sponsor clause be inserted so that your advertisements do not become diluted
An obvious but essential area of the agreement to be examined is the financial benefit regarding both the sponsor and the athlete. Financial issues such as the cost of the sponsorship deal, the method of payment, the basis for establishing the amount (i.e. Salary, Commission, or both), the number of payments, the period of payments, and tax liability and implications should all be resolved at an early stage of the agreement.
- Seek to maximise return on investment
- Likely to push for a low percentage commission with no salary as there is less risk involved
- In the first year, seek a basic salary plus commission. This will give an indication of how well the product will sell and allow for estimation on a commission-only scheme.
- Seek clear and expressly stated points regarding the tax status of the Athlete (i.e. sub-contractor, employee, etc.)
4. Rights of Renewal and First Refusal
This is often regarded as an undervalued area of the agreement, more particularly by the athlete than the sponsor. It can often be considered as a boring legal part, but it deserves careful consideration. There are three main ways that a contract can be extended: rights of first refusal, renewals, or rights of first negotiation.
1. Rights of First Refusal
The right of first refusal is usually used to protect the interests of the sponsor. It allows them to have the first option to extend the athlete’s contract by agreeing to match any agreement that the athlete may have negotiated with a competitor. The benefit to the sponsor here is that competitors may be reluctant to enter negotiations with an athlete as they would have to disclose what they are willing to offer to their competitor.
Renewal agreements may seem like the most straightforward approach in theory, but this can differ in practice. Renewals usually involve minimal changes to the original agreement; nevertheless, if crucial elements that need reviewing such as payment structures, contract duration, and other implied obligations under the contract are not renegotiated, this can lead to unnecessary litigation.
3. Rights of First Negotiation
This is a similar provision to rights of first refusal; however, it differs as it is designed to protect the athlete more than the sponsor. This provision allows the athlete to have the first opportunity to accept or reject any offer put forward by the sponsor before they can offer it to any other athlete in the open market.
Assignment is an uncommon factor of disputes but one that should be considered when drafting the agreement. Assignment comes into effect when a sponsor agrees a deal with an athlete and subsequently the sponsor merges or is acquired by another company. The issue that arises here is whether the athlete remains obliged to the new company as per the terms of the agreement.
- If the opportunity to merge or be acquired by a large company presents itself, then the Board of Directors of the sponsor company do not want to have to consider an athlete they sponsor as a potential threat to this deal.
- The sponsor should be aware of any potential mergers and incorporate a provision in their agreement that ensures the above scenario does not come to fruition.
- Athletes should not have to worry about losing money if the original sponsor company is merged or acquired.
- They should demand a provision that allows them to continue working in a similar capacity within the new company.
- The potential opportunity of working with a larger brand post-merger could result in an increase in popularity and therefore an increase in demand through affiliate marketing.
6. Governing Codes of Conduct
There are an ever-increasing number of governance codes for athletes to follow. It is essential that these codes do not get overlooked when a sponsorship agreement is being drawn up. An oversight to such regulations may lead to the agreement becoming null and void or a lengthy legal battle with the governing body.
An example of where this may occur is when an athlete is playing as a member of a club sponsored by one sportswear brand and a competitor of that brand approaches the athlete to wear their clothing as a secondary element to the main kit (i.e. thermal underlayer). This gives rise to a conflict of interests, as discussed above, but it may also breach the governing code of the club.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2017 John Wolfgang
Heidi Thorne from Chicago Area on January 10, 2018:
I think the same can apply to today's "influencers," sports-related or not. Great review of sponsorship agreement mechanics!